Why we should look back at the past and uncover the ghost of the free banking era.

Written by: Thejaswini M A

Translated by: Block unicorn

In 1840, a shopkeeper placed a ledger under the counter. When you paid with paper money, he would take out the ledger and check how much your money was worth that day.

A ten-dollar bill issued by the Cincinnati bank was not worth ten dollars everywhere. It might only be worth nine dollars. Its value could vary greatly. If the bank went bankrupt and the news had not yet reached his county, it could even be worthless. The most famous book of this kind came from Philadelphia, called "The Bicknell Counterfeit Detector," which was essentially a price list for currency, printed in order, because the value of a dollar varied according to the name printed on the bill.

This was America from 1837 to 1863. Any bank that had a state government charter could print its own money, and obtaining a charter was fairly easy. Michigan took the lead in 1837, allowing banks to open almost without any conditions, and without the approval of the legislature. Thousands of different bills circulated at the same time across the country. About one-third of the circulating bills were outright counterfeit.

Each bill represented a gamble on the issuing bank. This system collapsed during the Civil War when the government printed a uniform dollar, partly to raise funds for the war, but more importantly, because trust in thousands of private notes had exhausted the nation’s finances.

On June 22, the Senate passed the "21st Century Housing Market Initiative" with an overwhelming majority (85 votes in favor, 5 against), and the House followed suit the next day. Hidden in this housing bill was a provision preventing the Federal Reserve from issuing central bank digital currency (CBDC) before 2030.

This is why we are looking back at the past, to uncover the ghost of the free banking era.

The dollar balance in a Venmo account is a promise from the bank to you; if that bank goes under, your money faces risks beyond the coverage of the Federal Deposit Insurance Corporation (FDIC). Central bank digital currency (CBDC) bypasses banks and allows holders to hold national currency directly in digital form.

The Senate rejected this proposal for two reasons.

The government-issued digital dollar could track every penny you spend and, like China's digital yuan, could freeze your wallet at any time.

Secondly, banks strongly opposed it since funds held directly at the Federal Reserve would never enter their deposit accounts. They would lose the float they depend on.

Now, even those who are supposed to sign seem uncertain about what they are signing. On June 24, just an hour before the signing ceremony was about to begin, Trump canceled the ceremony and requested the passage of a voter identification bill that the Senate had already rejected. However, this ban will likely end up becoming law.

Well, the government will not issue a digital dollar. But in the meantime, it has handed that task to private companies. This means that the old path from 1840 has returned.

Even after the "GENIUS Act" is signed in July 2025, the current regulatory focus remains primarily on the quality of reserves, rather than strict entry barriers. Dozens of companies are lining up to apply for charters to issue their own dollars. Every fintech company wants its own branded currency.

The current market size is about $312 billion. Tether's USDT and Circle's USDC account for about 80% of that. Additionally, there are PayPal's PYUSD, Ripple's RLUSD, and Paxos' white-label tokens minted for anyone in need. They all echo the Cincinnati bank's assurance: trust us, they are backed.

It's not 1840, and Jim Carrey is still trying to prove he is not his own clone. We trust nothing, do we? It's both a good thing and a bad thing. This distrust compels issuers to provide evidence of their reliability, while also leading them to expect the market to remain shallow, as a group of people who are skeptical about everything but never verify any facts are exactly the ones you are most likely to give your money to.

An illegal bank claims its notes are backed by silver in a vault. And the so-called vault is often just a barrel of nails hidden deep in the woods, inaccessible to any inspectors. Stablecoins are backed by U.S. Treasury bonds and publish receipts monthly. There are significant differences in collateral between the two, and stablecoins are superior in this aspect.

Setting aside the collateral issues, another problem arises. A dollar is worth a dollar because everyone simultaneously agrees on three things: the issuer has confidence in the money; the reserves exist in reality and can be accessed; and if things start getting out of control, someone will intervene. Taking all three into account, a dollar is worth a dollar, and you do not need to think about it further.

When one side wobbles, the currency will be priced individually by the issuer, just like in 1840. That is how currency works.

Even the operation of checking accounts is the same. The government guarantees all three, so you see nothing of it. Stablecoins are different; you can clearly see the mechanism of how this machine works.

Tether is the largest issuer of USDC in the world, and it is also the least transparent. Its reserve reports have been questioned for years. In 2021, Tether settled with the New York Attorney General, admitting that its reserves were not always as sufficient as claimed. It had lent billions of dollars in reserves to affiliated companies. Circle, on the other hand, is seen as the "good guy" and is favored by regulators. It undergoes audits every month and is set to go public starting in 2025. However, what happened in March 2023? When Silicon Valley Bank (SVB) collapsed, Circle had $3.3 billion in USDC reserves at SVB. Before the government intervened to back SVB deposits, USDC briefly dropped to 87 cents over the weekend. The reserves were adequate; however, a dollar was worth only 87 cents within a mere 60 hours because people no longer believed USDC could be redeemed.

Nowadays, every company in the payment space wants its own dollar. PayPal has PYUSD, Ripple has RLUSD, and there are USDG operated by alliances, along with a range of bank tokens from companies like JPMorgan and Western Union. In December 2025, the Office of the Comptroller of the Currency (OCC) issued trust bank licenses to Circle, Paxos, and three other cryptocurrency companies, with others soon to follow. Shut out of the market, Tether issued an independent U.S. token called USAT to regain a foothold.

However, it is important to read the fine print. These are "trust bank" licenses, not insured bank licenses. The account functions provided by the Federal Reserve are very limited; there is no overdraft limit, and no access to emergency loan windows—those emergency loan windows are the real key to saving banks at the onset of a run.

And those people you pay for tickets are their record companies.

Paxos, which issues PYUSD and six other branded tokens, was ordered by New York regulators to cease issuing Binance's stablecoin back in 2023. Some newer tokens have no cash backing at all. Ethena's USDe relies on derivatives trading strategies to maintain its peg.

The bill prohibits these issuers from paying you interest, so they scramble to find loopholes. Coinbase will pay "rewards" for USDC. PayPal offers 3.7% yields on PYUSD. These attractive yields draw in your funds. Unlike ordinary bank accounts guaranteed by the FDIC, these funds come with no security whatsoever.

Since stablecoin tokens are backed by U.S. Treasury bonds, the money supply is still determined by Washington. The interest from these bonds ultimately flows to the issuers. Tether has about 100 employees and expects profits of around $10 billion in 2025, with its holdings of U.S. Treasury bonds even exceeding those of Germany.

But if everything fails, you bear the entire loss. A bank run is like everyone rushing at the same door that was only meant to allow a trickle through. The redemption channels for stablecoins are very limited. Most people cannot redeem Tether at all. They can only sell Tether to a few arbitrageurs, and there are only about six arbitrageurs on average each month, with a minimum amount for redemption set at $100,000.

If Tether collapses tomorrow, the price of 100 billion tokens will drop to zero. Tether holds so many Treasury bonds that when it panics and sells, it will shake the bond market itself.

Washington intervenes because the alternative is a coordinated freeze of credit and liquidity.

Moreover, the government does not even need a global economic collapse to do this. In 1971, the government, in a tie-breaking vote, used a $250 million loan guarantee to save Lockheed, preserving 60,000 jobs and the Pentagon's largest supplier. An admiral who witnessed it called it "a new idea, that profits are privatized and losses are socialized."

In 1970, when the largest railroad company, the Pennsylvania Railroad, went bankrupt, the government allowed the company to fail and then spent public funds to build Conrail to take over its tracks because trains had to keep running.

A dollar token used by 250 million people easily meets that requirement. For a long time, the government has refused to guarantee private risks until private risks threaten the stability of public infrastructure.

There are many ways to address this issue. What if, instead of using banks like Silicon Valley Bank (SVB) which might fail, the issuer's reserves were held directly at the Federal Reserve? The risk of a bank run would significantly decrease, as the Federal Reserve is not as prone to failure as regional banks. Alternatively, issuers could purchase real deposit insurance, so they would pay for this in advance of any crisis.

The government could try to tax the yields on Treasury bonds and return the proceeds to the public bearing the risks.

But we certainly do not like those, right? The reserves of the Federal Reserve mean that the Fed has become the last line of defense. Insurance means there are government agencies backing it, just like the FDIC puts pressure on the Treasury when things get very bad. Taxing the yields means treating these companies as public utilities. We do not want the government to re-enter the currency domain. That is precisely the reason for prohibiting central bank digital currencies (CBDCs).

Let us return once more to human history. Around 375 BC, in the Athenian marketplace, the city hired a slave to sit next to the banker to authenticate silverware. He would cut counterfeit gold coins in half and return the genuine coins to the customers. As long as the silverware was pure silver, he would even let go of foreign silver coins imitating Athens' owl design. At that time, there was a law that required all merchants to accept silverware certified by him.

Two thousand four hundred years later, have we really arrived at our destination? The comforting thing is that major transformations are always accompanied by some loopholes, which gradually get filled over time. Perhaps in ten years, reserves will be more substantial, and rules will be more effective.

But what you need to focus on is the trade-offs.

Think about what you would give up. Right now, your dollars are backed by the FDIC, and the Federal Reserve can respond to panic by printing money. Though slower, it is one of the most reliable assets you can hold. Banks lend it out the day the dollars are issued. The Federal Reserve reduced the required reserve ratio to zero in 2020, so by law, your bank does not have to hold even a cent of your deposits. What truly backs you is FDIC insurance, with the fund holding about $15.4 billion to ensure the nation's insured deposits. In simple terms, for every dollar of insured amount, there are about 1.5 cents in funds held in reserve. Even so, it still cannot cope with a simultaneous systemic panic. If the fund is exhausted, the FDIC must immediately activate its backup credit line with the U.S. Treasury or coordinate with the Federal Reserve to print money to release emergency liquidity.

In a month in 2023, three major bank failures in U.S. history occurred in succession: Silicon Valley Bank, Signature Bank, and First Republic Bank. To prevent bank runs, regulators broke the $250,000 deposit insurance cap and fully compensated all non-insured depositors' losses, mirroring the emergency measures they later took for stablecoins. This action led to a loss of about $20 billion for the fund.

Stablecoins are cheap, fast transactions. They are open around the clock, with reserves held in on-chain viewable vaults, and the best issuers publish receipts monthly, which provides much more information than banks disclose regarding deposit whereabouts.

Would you trade the first for the second?

I would do so without hesitation. Maybe you would too. You read this article, you are already in it, you know what de-pegging is, and you know where to start with it. But the real test lies with ordinary people. This person uses USDC for payments because it is the easiest dollar they can hold. This store accepts PYUSD because the transaction fees are lower. Most people never bother to understand the risks behind this simple system.

After all, the speed of convenient spread is much faster than the speed of understanding.

The value of your money depends on the credibility of the issuing entity, and the credibility of the issuing entity depends on the credibility of the state that backs it.